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In a significant move to enhance best-price execution for investors and align with global practices, Indian stock exchanges and clearing corporations are set to implement a unified contract note system starting May 2025. This change will make trades exchange-agnostic by issuing a single contract note per security, at a consolidated price for trades executed across multiple venues, thereby levelling the playing field for both exchanges.
What is a contract note, and why is it important?
A contract note is a legal document issued by brokers to investors, summarising all trades executed on a trading day. It includes details such as the security name, quantity, trade price, time, brokerage charges, and applicable taxes. Serving as official proof of trade execution, it is essential for record-keeping and tax purposes. Currently, if an investor splits trades between the two exchanges, NSE and BSE, they receive separate contract notes from each, showing its own Volume Weighted Average Price (VWAP) for the same order.
What are the issues with separate contract notes?
Receiving two separate contract notes per exchange with different VWAPs adds to investors’ costs and operational burdens, often outweighing the benefits of better prices on another exchange. Direct costs include transaction charges or ticketing costs, which is a fixed expense for even a single trade on another exchange venue. Separate notes also lead to operational inefficiencies, such as generating multiple lines for numerous orders, failures in matching orders, and extra paperwork. Foreign Portfolio Investors (FPIs) require investments in technology and processes unique to India, as a common contract note is the global norm. To avoid additional costs and operational hassles, many FPIs prefer trading through a single stock exchange, creating an uneven playing field between the two exchanges.
What are the benefits of a common contract note?
A common contract note allows investors, particularly FPIs, to become exchange-agnostic and trade at the best available price without worrying about additional costs or operational difficulties. Once implemented, brokers and custodians can rely on smart order routing (SOR) tools to ensure orders are matched at the best price, irrespective of the exchange venue. A single note will provide a consolidated VWAP per security across all exchanges for trades executed during a settlement cycle, minimising price discrepancies and rounding-off errors. For stock exchanges, this move removes disadvantages created by the documentation process, allowing them to compete fairly based on liquidity and available prices. Currently, volumes are more skewed towards NSE, but could spread out evenly across exchanges, incrementally benefiting BSE, according to some FPIs. It would also improve the interoperability between stock exchanges.
How is the common contract note being implemented, and what changes are required?
The rollout is expected in phases, initially focusing on cash market trades, followed by the futures and options (F&O) segment. To prepare the market ecosystem, brokers, their back offices, STP providers, clearing corporations, and custodians are making necessary system changes. For instance, systems are being updated to recognize trades without stamping them to a specific exchange. Clients will experience more automated order placements, requiring fewer trades to be recorded and allocated. To test market readiness, clearing houses have conducted demo tests from April 7 to 23. So far, 10 rounds of market-wide User Acceptance Tests (UAT) have been completed in coordination with all Market Infrastructure Institutions (MIIs). Over ten custodians across both clearing houses have confirmed their system readiness, and around ten brokers with ICCL have participated in all testing rounds. Another market-wide live mock is planned for Saturday, April 26. SEBI has also conducted webinars with FPIs to explain the technicalities and upcoming changes.
Published on April 26, 2025
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